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Tuesday, January 22, 2013

This is a continuation of an analysis on the Singapore property market. Interested readers can start from the first post.

So we debunked the three major bull arguments in the last two posts.

1. Strong demand. While true, it is supply and demand that matters and we saw that supply should outstrip demand in the next few years.

2. There are a lot of rich people to support prices. Rich people do not simply buy when prices fall. They are also governed by greed and fear.

3. Interest rates are low. This was partly the reason why property prices skyrocketed to stratosphere and caused instability in the system. Now that the system is on the verge of collapse, interest rates do not matter that much.

But what is most important, as in all investment, is always valuation or a methodology to gauge how cheap or expensive is the investment in question.

Property valuation can be calculated based on rental yield. Rental yield is calculated simply by dividing th annual rental over the property price. A normal range of rental yield globally goes from 1-2% to 8-9%. 1-2% being very low meaning that the property is very expensive and 8% means that yield is very high and hence implying that the property is very cheap.

Singapore's residential property market has ranged from 2% to 5% looking at our own history. Most high end property today are closer to 2%. In stocks PE terms, this translates to PE of 50x - Facebook and Amazon trades at such crazy valuations. In the global property space, only a handful of cities trade at or below 2% yield, such as Taipei, Beijing, Shanghai and Monaco. The charts below give a good comparison where Singapore stands.

Asia rental yield comparison

The other way to look at the 2% yield is to think about payback in years. At 2% you need to to rent the property for 50 years just to make back the capital (and this is simplistic bcos we are talking about gross yield and not net yield - ie after we take out taxes, downtime and other peripheral expenses like renovation etc). Some might argue capital appreciation matters not rental. But this argument is so absurd it is actually laughable. Why do I say so?

Essentially what the above argument means is that from 2% yield, prices can still go up further compressing yield to 1+% (Price and yield has an inverse relationship, if price goes up it means that yield should fall). Assuming that yield in Singapore actually goes to 1%, then it takes 100 years to make back the capital, and leasehold is only 99 years in Singapore. (Recently most of the launches are leasehold as developers realized it is actually much better for profits this way.) So isn't laughable that someone would buy something at $100, get $1 every year for the next 99 years, and be happy with $99 at the end of the century?!?

There is 1 country in the world where yield is at 1% level, it is Monaco. Luckily for Monaco, nobody actually lives there as it just a getaway for rich and famous. Yes, the rich and famous do like to pay $100 and only get back $99 after they go from ashes to ashes. But that's rich and famous for you. Of course, there are also no taxes, no restriction on foreigners and property ownership is freehold.

Monaco at 1.9% rental yield

Back to Singapore, so what is the likelihood that yield goes lower to 1% matching Monaco, i.e. prices can still double from here
or yield actually fall to historical norm like 4-5%, i.e prices fall a lot from here?

The answer is pretty obvious. Even if prices do not fall, it is hard to imagine a lot of upside from buying at such prices as yield should not go to 1% unless Singapore becomes like Monaco. Therefore upside can only come from absolute rental increase which can then support absolute higher prices. (In equity parlance, this means upside is coming from earnings growth and not valuation expansion.) Alas, our rental rates are already at a high level comparable to global cities such as New York, London and Tokyo. So again, this points the conclusion that prices is likely to fall.

Sky Habitat is leading that descend from heaven now as prices plunge from $1,700psf to the current $1,400psf. I would expect it to fall closer to $1,000psf over time as that is the price level that is supported by valuation.

Next post, we talk about where prices should be and what is the alternative scenario.

Saturday, January 12, 2013

This is a continuation of the last post talking about Singapore property market's imminent crash. I wrote most of what is below before the additional cooling measures were announced. Now that foreigners, and even Singaporeans are slapped with additional stamp duties and smaller possible mortgage loans, Sky Habitat should crash faster.

So we can now see that supply should outstrip demand and Economics 101 tells us that prices have to fall. But wait, there are all these global rich people that will simply buy up Singapore right? The Chinese super rich love Singapoore. So do the Indian billionaires and Indonesian tai-tais. Not to mention Singapore's own rich people. How can Singapore property fall?

This has to be my favourite argument (and my favourite counter argument). Logically, it is hard to debunk. Yes Singapore has always been a safe haven and has attracted a lot of money. In fact, it might be partly due to this that we became the nation with the most no. of millionaire households per population. Of course, a lot of born and bred Singaporean have also worked hard and made a lot of money (like top civil servants and ministers, finance people, top executives and readers of this blog).

So they will simply buy if prices fall by just a bit. Now how can price fall then? Waiting for prices to fall is a futile game.

Sadly, things do not work this way in reality.

When prices fall, liquidity dries up. Rich people do not simply buy when prices fall. If so, they would have continued buying Sky Habitat after its Phase 1 successful launch which sold 80%. It's now 25% below launch price, shouldn't all the Bishan rich go cheong (dash) into the showroom and write as many checks as they can? If so, why is Sky Habitat now 70% unsold and Capitaland trying all ways and means to get people to buy?

This pic is taken using the URA app showing Sky Habitat's price decline.

Humans are driven by greed and fear. When prices are rising, greed prompts people to buy, afraid of missing the train. When prices plunge, fear takes over. People, rich or poor, simply stop buying. There was no less rich people when Tokyo prices collapse in 1990, or in US after Lehman, or in Shanghai last year (2011). Florida beachfront property plunged 50% and is now much cheaper than Sentosa. Why didn't the US billionaires buy up Florida? Why didn't the Chinese super rich buy and support Shanghai property prices last year?

Rich people are also humans and hence experience greed and fear. In the plunge, fear takes over and only astute investors dare to buy, and only when value appears (ie price is much less than intrinsic value).

Ultimately, property is an investment and we should apply the value philosophy. But more on this later. Now we look at the low interest rate argument.

It is true that interest rate should remain low for some time. Singapore's interest rate is pegged to that of our trading partners as our central bank (Monetary Authority of Singapore or MAS) had decided to use exchange rate to manage our monetary policy some time back. This has to do with interest rate parity and the impossible trinity, interested parties can find out more on Google. The conclusion is: as long as global interest rates remain low, Singapore's mortgage rate should not increase.

So, everyone can afford their mortgages, and will be enticed to buy more property right? How can prices fall?

Yes, this argument stands and on its own there is no way to debunk it. If everything is as per normal, ie prices are stable, there is no disruption, the world continues revolving. This was what happened before sub-prime and Lehman. US property prices kept rising, mortgages were safe, people had jobs and everything was fine. However as prices continue to rise and efforts were continously being made to make sure the party can go on, the market will increasingly become unstable such that any small shock will cause the whole house of cards to collapse. (Well some experts do think that the global economy with all its intricate links supported by enormous debt is analogous to a house of cards.)

Back to Sky Habitat, so now that it has fallen 25%, there could be a few owners that were not prepared for such fall. They wanted to flip before TOP (forgot what the acronym stands for but basically it means when the property is ready for stay), now they have sell, which will exacerbate the price fall. At the banks, some mortgage had valuation there was at $1,700psf. Now they have to revalue the property and ask owners to top up 25% (which could be $500k). Some bankers might choose not to, bcos they know the owners cannot pay. But even if one banker insists on a pay up, then the owner might be forced to sell. So when we are at the top, any small shock will cause things to collapse. Not to mention, the Government just came out with major bazooka cooling measures to stop the frenzy.

So the interest rate can and should remain low. But when the system is especially fragile, it does not take much to cause a collapse. The US sub-prime and Lehman crisis didn't come about with the Fed doing interest rate hike. In fact, it came out of the blue. Things just fall apart, like the balloon that is being pumped air will just reach a point that it will simply burst.

We can gauge Singapore's property market nearing that breaking point when developers have to privatize themselves to avoid paying taxes (read SC Global), 50 year mortgages and HDB Minister coming out to warn EC developers not to get ahead of themselves. We are not far and may have hit that point last night.

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